Do Equity Index Annuities Deserve The Bad Rap?

Equity index annuities are very much misunderstood by the buying public.

In a recent article by David Scranton of Scranton Financial Group about "annuity bashing," he says, "consider the source when it comes to negative press about annuities." It could be from an uninformed writer, wire houses, independent broker-dealers, mutual fund companies or banking institutions.

Dollars used to purchase annuity contracts are not available for their stocks, bonds, mutual funds, CDs and/or savings accounts. Or, it could be a family member, a friend, or a neighbor, that knows someone that unknowingly purchased an annuity contract that did not meet their suitability requirements, due to insufficient income, liquid assets, and/or total assets, sold to them by a greedy sales person.

With the aforementioned, should a major illness, the diagnosis of a chronic health issue, the loss of a job, or a myriad other personal issues occur, this could be cause for the horror stories that surface, and make headlines in the media. As an example, "I didnt know there was a 10 percent, 15 percent or 20 percent early withdrawal penalty," the result of having to terminate a contract, due to a large cash need.

Or, "they are very expensive and cost too much." Or, "I do not want to tie up my money forever."

Historically, equity index annuities have been around for about 20 years. As a fiduciary, I first became aware of their existence in 1997, during the late 1990s bull market. Within three years, the technology, dot.com bubble burst, and again investors were scrambling and looking for safety.

Therefore, I began my due diligence in earnest, and discovered that this concept, if utilized properly in an asset allocation strategy, could provide a variety of solutions, and relieve some the angst of equity investing. Thus, I have been recommending EIAs as a complement for my client equity/fixed income asset allocations for the past 14 years.

Like any new concept, in the beginning there were only a handful of insurance companies offering EIAs. They were simple, not many bells and whistles ... pretty straight forward. Since the new millennium, as their popularity was gaining momentum, additional insurance carriers were entering the market, adding new features and benefits, and providing more competition.

The Great Recession of 2008 brought with it not only the all too familiar fear of a crashing financial market, but in addition, a devastated credit market, and plummeting real estate values. As a result in the collapse in interest rates, the insurance companies crafted new features, providing additional flexibility and guarantees, to combat lower cap rates for the crediting strategies.

Some of the benefits of an Equity Index Annuity contract, that very seldom reach the press are as follows:

* Safety of Principal no downside risk, guaranteed by the insurance company.

* Upside Potential with crediting strategies, available annually for reallocation, such as: Fixed Interest Rate; S&P Average Cap; S&P Annual Pt to Pt; S&P Monthly Pt to Pt; Dow Average Cap; Dow Annual Pt to Pt; U.S. Treasury

Bond cap; just to name a few. "The experience and expertise of a good adviser can potentially add value for reallocation at contract anniversary."

* Flexibility multiple contract durations, i.e., create an annuity ladder with multiple contract(s) or carrier(s) with longer durations providing immediate vesting bonus with a range from 5 percent to 12 percent or higher, depending on the contract or carrier.

* Annual Reset interest credited on contract anniversary establishes new base for example, $100,000 at 5 percent equals new balance of $105,000. This becomes the guaranteed amount for the next year.

* 10 percent per year, penalty free withdrawals for expenses or transfer to reallocate.

* Retirement Income initiate a monthly income for life, based on the higher of the current contract value, or the UBR Income Account Value.

In conclusion, during the first 20 years in the life of the equity indexed annuity, now referred to as index annuity, they were purchased for safety ... with the recent end of the Federal Reserve Quantitative Easing (QE 3), forecasters are predicting, 2015 could very well be the year in which the longest U.S. bond bull market in history will come to an end. Thus, index annuity contract owners, already have a very suitable alternative to climbing the "slippery slope" of rising interest rates for fixed income in the coming years. Could be a win-win.

Disclaimer: the aforementioned is for informational and educational purposes only, and not a solicitation or recommendation to purchase or sell, a specific contract, from a specific insurance company.

* James E. Stahel is founder of Stahel Financial Planning Ltd. in Wauconda.